Captive Power Plants in India: Combatting Circuitous Structuring of Shareholding Requirements

The Electricity Act, 2003 (‘Electricity Act’) read with the Electricity Rules, 2005 (‘Electricity Rules’) regulate the functioning of CPPs in India. This article examines the 2018 amendment to Rule 3 of the Electricity Rules (yet to be notified ), which, inter alia, sought to require the industrial users of a CPP to contribute 26% of its equity finance (and thus 7.8% of total finance costs, based on a notional 30:70 debt:equity split, specifically without differential voting rights. This amendment was moved on a request of the state distribution companies (‘discoms’) who were suffering significant losses owing to the shift of industrial consumers to CPPs. Upfront payment to existing individual power plants were often disguised as equity investment to avail of captive power benefits for both the user and the generator. On the other hand, the amendment did not augur well for captive power players, who would have to increase the value of their equity investment in their CPPs to comply with the amended requirements and retain the benefits of operating their plants as CPPs. The transaction costs of this amendment are also vast, for existing joint venture agreements and debt financing agreements would need to be unraveled and remodeled to comply with the new rules. Part I provides a brief outline of the genesis of CPPs and their categorization in India. Part II examines the rationale behind the adoption of CPPs. Thereafter, Part III analyses the extant legal regime on CPPs, looking at the Electricity Act and the Electricity Rules and building on this understanding, Part IV highlights the impact of the 2018 amendment on CPPs. Part V concludes.